If you are someone who has recently started a business, or are considering doing so in the future, you might have considered utilising the turnover tax system. SARS allows businesses whose taxable turnover does not exceed R1 million, and whose total assets do not exceed R5 million for a year of assessment, to register as a micro business and pay tax based on turnover instead of income tax which is based on taxable income.
Turnover tax may seem enticing due to its lower tax rates and relative simplicity when compared to normal income tax. However the following factors are a few that should be considered before deciding on using this system:
- Because the turnover tax regime taxes registered micro businesses on turnover, and not taxable income, micro businesses are unable to deduct any expenses or claim tax deductions in determining their tax payable.
- Because a registered micro business cannot claim any tax deductions or expenses, they cannot utilise any assessed losses for the current or past years.
- Receipts of a capital nature are excluded from taxable turnover and are thus not subject to turnover tax.
- If your businesses year end date is not the last day of February, or if the business is conducted through a company, the shareholders of which are not all natural persons, it will not meet the qualifying criteria for turnover tax and will be unable to register as a micro business.
Considering the above factors, turnover tax may not be the best system to utilise for your newly formed business if you are expecting low profits or even an assessed loss to be made in your initial years of trading. Should this be the case, the Small Business Corporations Tax regime may be better suited to your needs.
It has been predicted by the National Development Plan that by 2030 small, medium and micro enterprises will provide 90% of all new jobs (Smit, W. 2017). This proves that the creation and survival of these enterprises is crucial to the current functioning, and future growth of the South African economy. Thus, it is important to make an informed choice when selecting the tax system that your business may qualify to utilise, in order to ensure its prosperity and longevity.
Troy Korevaar
Corporate Tax Compliance Officer, Cape Town
Related articles
The new Expat Tax on income earned abroad
"Double-dipping" of government grants